Situational Analysis Beyond Neoclassical Economics

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Backhouse - - Journal of Economic Methodology 11 3 Barkley Rosser - manuscript. Mohammed H. Barkley Rosser - unknown. W ould the ordinary person regard how economics students are educated as a significant political issue? Probably not, but the way economics students are educated has much wider implications for society than is commonly imagined.

Every year thousands of economics graduates take jobs in the City, thinktanks and at the heart of government itself. Economics is highly technical and often mathematical, and this elevates economists to a position of expertise from which they mediate economic analysis to the British public.

The Unreal Basis of Neoclassical Economics – American Review Of Political Economy

They are the guardians of our economy, charged with its upkeep, and they play an important role in shaping political narratives around economics. Yet British universities are producing economics graduates who are not fit for this purpose. The financial crisis represents the ultimate failure of this education system and of the academic discipline as a whole.

Economics education is dominated by neoclassical economics , which tries to understand the economy through modelling individual agents. Firms, consumers and politicians face clear choices under conditions of scarcity, and must allocate their resources in order to satisfy their preferences.

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Different agents meet through a market, where the mathematical formulae that characterise their behaviour interact to produce an "equilibrium". The theory emphasises the need for micro-foundations, which is a technical term for basing your model of the whole economy on extrapolating from individual behaviour.

Economists using this mainstream economic theory failed to predict the crisis spectacularly. Even the Queen asked professors at LSE why nobody saw it coming. Now five years on, after a bank bailout costing hundreds of billions, unemployment peaking at 2. The Post-Crash Economics Society is a group of economics students at the University of Manchester who believe that neoclassical economic theory should no longer have a monopoly within our economics courses. Societies at Cambridge , UCL and LSE have been founded to highlight similar issues and we hope this will spread to other universities too.

At the moment an undergraduate, graduate or even a professional economist could easily go through their career without knowing anything substantive about other schools of thought, such as post-Keynesian, Austrian, institutional, Marxist, evolutionary, ecological or feminist economics.

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Such schools of thought are simply considered inferior or irrelevant for economic "science". We are taught to memorise and regurgitate neoclassical economic theories and models.

Markets are human creations that operate differently in various economic systems, and the various existing and potential economic systems themselves are human creations. The first real question then is if under an existing system private capitalist markets driven by the profit motive do better than possible alternative human creations for providing the good or service, potentially driven directly by the desire to meet specific human needs.

Important examples providing evidence of the inferior performance efficiency and effectivity of private capitalist market-driven systems are well run social security systems and single-payer health care systems. Avoiding the error of accepting the system as given, a deeper question would be if under some different economic system, which was not built to favor capitalist accumulation, alternatives could outperform profit-driven markets operating in capitalist systems.

How Did Economists Get It So Wrong?

Behind this assertion is the idea that markets are natural and could run without any government intervention, and that such natural markets tend to be efficient but sometimes are not quite optimal. In those cases the efficiency of markets could be improved by government tweaks.

To the contrary, in the real world all markets are created by governments, which both establish the rules of the game and enforce them, and thereby determine market outcomes. If the government passes laws requiring that food be safe, that changes the market for food, and yields different market outcomes than if those laws did not exist. With this understanding, principle 7 is reduced to the not very profound statement that because governments create markets, they have the ability to create them with better or worse outcomes.

Market rules are shaped by power structures to benefit some classes and other social groups more favorably than others for example capitalists at the expense of workers, First World countries at the expense of Third World countries, etc.

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Higher GDP per capita does not necessarily result in a higher material standard of living for all people within, as well as between, countries. Neoclassical economics does not address the extension of principle 8 to what people in the real world are actually concerned with, their quality of life, for which the goods and services produced are just one among many determinants. In the real world the relationship between prices and the money supply is complex: expanding money might cause a jump in prices or it might cause no price increases at all, depending on many other things in the economy.

The relationship between inflation and unemployment is complex and does not follow a systematic pattern. By the s data from the real world had caused textbooks to go from Phillips Curves to Shifting Phillips Curves to abandoning them entirely.